September 12 2014.

The UK recovery is on more solid ground, with GDP surpassing its pre-crisis peak in the second quarter. Most encouragingly, business investment has put in a strong showing over the past few quarters, providing a boost to future prospects and putting the UK on a more sustainable path. We forecast GDP growth of 3.0% this year and 2.7% in 2015, unchanged from our previous forecast. Business investment looks set to continue growing solidly, providing support to GDP growth, as the constraints posed by finance availability and uncertainty about demand continue to wane.

However, risks to the outlook remain, particularly from global developments: the UK is exposed to a prolonged period of subdued activity in the Eurozone; geopolitical risks have increased following heightened tensions in the Middle East and Ukraine; and the eventual unwinding of monetary policy stimulus (particularly in the US) could lead to renewed volatility in financial markets, posing a risk to financial market stability.

Key economic indicators
Industrial production made a firm start to Q3 with growth of 0.5% in July, the second consecutive month of expansion. This was slightly higher than growth in June and over Q2 as a whole (both 0.3%). Meanwhile, manufacturing (which makes up 68% of production) expanded by 0.3%. Nonetheless, the underlying trend in production and manufacturing weakened further: over the quarter to July, both contracted on the previous three months (by -0.1% and -0.6% respectively), the first such declines since early 2013.

In August, the Markit composite PMI stood at 59.4, up from July’s 58.7 and slightly higher than that seen over Q2 as a whole (58.6). Having remained well above the 50 ‘no-change’ mark, this suggests that strong growth has been maintained so far in the third quarter. Growth was particularly strong in the services (60.5) and construction sectors (64.0). The manufacturing sector also posted a robust reading, but continued to ease back from the highs seen in the first half of the year (52.5). The PMIs contrasted a little with the CBI’s composite growth indicator, which showed that private-sector output growth slowed slightly in the three months to August.

At its September meeting last Thursday, the European Central Bank (ECB) decided to ease monetary policy further, building on the numerous policy measures announced in June. This came against a backdrop of weakening growth momentum in the Eurozone, and “downside risks increasing” of inflation expectations becoming de-anchored from the target (of below but close to 2%). The ECB cut the three main policy rates by 0.1ppts each, with the deposit facility now at -0.2%. The ECB also announced they will purchase non-financial private sector asset-backed securities (ABS) and covered bonds from October – this has been described as “QE-lite” rather than “full-blown” QE (which many have called for to stave off the threat of deflation), which would likely involve the purchase of government bonds.